Thursday, February 18, 2010

Macquarie Equities Research is out with a very interesting call on Goldman Sachs (NYSE:GS) saying their mid-quarter analysis of market conditions lead them to the conclusion that Goldman’s sequential improvement in 1Q10 will not be as robust as originally expected. Concerns over sovereign debt, potential antibusiness actions by the US government and China’s attempts to cool growth have conspired to slow the recovery in global capital markets activity.

- One Lone Bright Spot. One area where they are boosting expectations is FICC; they have long expected activity to rebound from weak 4Q09 levels, but the firm now sees FICC up 39% sequentially to US$5.5bn (vs 30%). Increased concern in the debt markets is helping volume, volatility and risk premiums.

- Comp Higher Too. Meanwhile, Macquarie now believes management will accrue comp at a 47% rate. They had originally expected a lower rate (45%) and true-up higher in 4Q10, once the political spotlight had faded.

- Firm's Estimates Even More Subject to Change than Normal. Obviously, midquarter updates can be dubious as so much can change between this point and quarter-end. However, they see a material difference between consensus (and their prior estimate) and where things are tracking at this point. Should concerns over Greece and US politicians subside, deal flow could re-emerge quickly-

Earnings and target price revision- Cutting 1Q10 to Street-Low. The combination of lower revenue and higher comp vs Macquarie's prior forecasts means our 1Q10 estimate drops to Street-low US$3.10 from near-consensus US$4.17. They are cutting 2010E to US$16.87 from US$18.24, mostly reflecting their 1Q10 change, as their outlook for the balance of the year is largely unchanged. Similarly, 2011 estimate remains unchanged.

Price catalyst- 12-month price target: US$185.00 based on 9.6x 2011E.

- Catalysts: Passage of the Volcker Rule would be a negative catalyst, as the firm estimates GS generates 13% of profits from prohibited activities. Narrowing bid-ask spreads would hurt FICC, its biggest contributor. On the positive side, if neither materializes, and the backdrop improves, they see the stock reaching their target.

Action and recommendation- With 18% upside to firm's target, GS shares are getting interesting, although they would like to see 25%-plus upside given the external risks. If their new 1Q10 estimate proves accurate, the firm believes that the stock could weaken to an attractive entry point of US$148.

Notablecalls: This is probably the first time for me to highlight any research from Macquarie, so welcomes are due. Macquarie has started covering many of the U.S. names over the past year or so and while they don't get much attention yet, this may be changing.

The Goldman call may serve to be a kind of a wake-up call for many - Q1 is off to a slow start. I suspect most market participants have accustomed to receiving only good numbers from Goldman.

Today, Goldman is facing a lot of pressure. Wherever injustice was done, Goldman has been involved.

At some point Goldman is going to end up with egg in their face.

Would not be surprised to see the stock trade down on this Macquarie call, once it gets circulated.